The definition of a company being “Employee Owned” is:
More than 50% of the company’s shares & voting rights are held directly or indirectly by employees.
Hence staff (collectively) control the company.
What Employee Ownership options are there?
Direct Employee Ownership
Each employee can own shares in their own name. The company has many independent minority shareholders.
Benefits
- staff personally own something of value
- they can potentially sell it later
- can form a “pension”. Not in the legal sense of the word, but the staff can retain the shares (even after leaving employment) and earn dividends indefinitely.
Disadvantages
- staff have to buy shares using their own money.
- not always easy to find a buyer if/when they want to sell.
- can be an admin pain to keep track of who owns what, who’s entitled to what, and who should incur what taxes.
Indirect Employee Ownership
An entity owns shares on behalf of employees. Most commonly this is a trust, an Employee Ownership Trust (EOT).
Benefits
- staff don’t have to pay for shares, nobody putting their house on the line to “buy in”.
- typically a one off transaction where the trust buys the shares, then stability. Nice and simple.
- all employees benefit. Not restricted to just those wealthy enough to afford to buy in.
Disadvantages
- staff individually don’t own anything. They have nothing they can sell.
- when staff leave the firm, they cease to be beneficiaries. Therefore an EOT in itself won’t provide for staff in their retirement.
Does it have to be one or the other?
No, you can have a bit of both. Eg an EOT could own 60% of the company’s shares (indirect employee ownership), with the other 40% being owned by individual employees (direct employee ownership).
Some suggest this works well, as you get a combination of:
- all employees benefit from the EOT side, everyone is involved
- key staff can be “tied in”/more heavily incentivised with direct ownership
Normally if an EOT is involved, it will control the company (ie have >50% in its own right).
This is due to the tax perks available for EOTs, that only apply when it gets control.
Introduction to Employee Ownership Trusts
Here at Go EO, we focus on EOTs. There’s a bit of hassle doing the transition (which we help with). It may also take founders/staff time to get their heads around how it works.
However, that’s a one-off. You’ve then got a stable structure that can last for many decades.
It will look after all employees, current and future. When staff join/leave, there’s no share related transactions.
What actually is a Trust/EOT?
Trusts are an unusual concept. They’re not physical things you can see or touch.
Most people have negligible experience of them. They may have heard about some people having “a trust fund” (especially our rich American friends), but know little beyond that.
A trust is an entity controlled by one group of people, for the benefit of another
This is why they’re useful in inheritance planning. Grandma wants to leave £millions to little Johnny, but doesn’t have faith he’ll use it sensibly yet! The wealth can be held “in trust”. A mature relative or solicitor/accountant is trustee. They control it. But little Johnny is the beneficiary, so should receive the wealth from it as/when appropriate.
For an Employee Ownership Trust:
- It owns the trading company’s shares
- Trustees make decisions in best interest of beneficiaries.
- Beneficiaries are the trading company’s staff.
What will the EOT do?
The EOT will ensure its financial obligations are met (payments to founder for purchase of shares).
Any remaining profits may be used for:
- profit share payments to employees
- working capital (buffer to help business run smoothly)
- retaining for future investment opportunities
The first benefits current employees now.
The others help ensure future profitability of the company. Hence benefiting employees too, albeit in the future.
Who controls the trust?
The trustees control it.
“Ok…but who/what are the trustees?”
There are a few options here.
From a practical perspective, the most common way of dealing with this is most EOTs legally have just one trustee, which will be a limited company.
Typically if your trading company is called Bloggs Ltd, the trustee company will be called Bloggs EOT Ltd, or similar.
Hence from a strict legal perspective most EOTs just have one trustee. We realise this contradicts much of what we’ve said elsewhere on this page! Read on…
“So…my company is controlled by another company?”
Legally, yes. The EOT company is then controlled by its own directors. It’s then easy to add/remove the humans who will actually control things.
The EOT trustee company will (for small situations) have three directors. Bigger companies may have more, sharing decisions more widely.
Legally the trrust has just one trustee, the EOT company.
However, informally we refer to directors of that EOT company as “the trustees”. They control the EOT company, so make its decisions.
“But…now you’re confusing me by mixing up terminologies?!”
It’s one of multiple technically incorrect but commonly used terms when it comes to EOTs! They are for simplicity/ease of understanding.
When it comes to the poeople in power:
– when we say “directors”, we mean directors of the trading company. They lead the business, being responsible for its key decisions.
– when we say “trustees”, we mean directors of the trustee company. Their role is important, but limited. They loosely oversee things, and can hold the directors to account.
Who will be the EOT human “trustees”?
You can choose. However the strong recommendation, especially where you have just three is:
A director of the trading company
Often the founder, at least short term. It must be someone who understands the finances, knows where the business is heading etc.
They will normally have the most knowledge about the business.
A staff member
Typically this would a well-respected, “shop floor” employee.
Not someone too senior, but often someone who’s been there a long time.
They’re a spokesperson for the employees, to ensure they have a decent say.
An independent trustee
Someone who doesn’t work for the company, but is connected. Often an accountant/lawyer/coach/business adviser.
By being external to the company, they can see the big picture more easily, and have experience of other businesses.
Does it have to be three trustees?
Legally, no. There are no fixed rules on how many trustees you need, or who they should be. However, it’s recommended to have at least one from each of the above three categories.
Three is also good as:
– decisions can’t end in deadlock
– at least two people must agree on a proposed action
A maverick trustee with whacky ideas can’t force them through without at least one other person agreeing.
For bigger employee owned companies, they may have several trustees from each subcategory. For small companies, one of each should suffice.
Three trustees may seem a lot if your company only has half a dozen employees. But three is a practical minimum. One person from each type recommended.
- with no director trustee, the trust may have limited access to data.
- with no employee trustee, it may seem staff aren’t listened to.
- with no independent trustee, there’s no balanced view from someone with nothing to gain/lose.
We can suggest suitable people to be your independent trustee if you don’t know anyone suitable.
Who chooses the trustees?
Often the founder will select initial trustees, for ease. They would of course get agreement from those people to be appointed.
Longer term, the employees should have the power to choose the trustees.
As above this should always consist of:
– a director trustee
– an employee trustee
– an independent trustee
The employees have the power to choose the individuals, subject to those categories.
Like a general election, voting is fairly infrequent. Each individujal employee may feel their vote doesn’t have much sway.
However, it’s something for them to take seriously, for the long term benefit of the business.
What power do trustees have?
On paper, their powers are massive. They can appoint/remove directors of the trading company. This would only be in extreme situations, but the power is there.
The trustees do not run the trading company.
That is left to the trading company’s directors, to make the important strategic decisions.
The trustees are there to:
- ensure the directors run things sensibly, to benefit the employees
- decide how profit share payments are apportioned between employees
- check the company is proceeding in line with its values
Who holds the power in EOTs?
Power in traditional companies
In a traditionally owned company, power runs vertically.
- Shareholders have power over directors.
- Directors have power over employees.
- Employees are bottom of the pecking order. They have power over nobody.
Small companies often have a sole director who is also the sole shareholder.
In that common situation, you have one invincible person at the top, everyone else must do their bidding (subject to HR law etc).
Power in an EOT company
In an EOT owned company, the directors still have power over the employees. Nothing changes there. The directors can hire and fire staff members.
However, beyond that, it’s very different.
Trustees replace shareholders. They have power over directors. But…trustees aren’t invincible. Employees elect trustees.
So:
– trustees control directors,
– directors control employees,
– employees control trustees,
– trustees control directors,
– etc etc.
A circle of power, nobody has ultimate control.
Everybody is overseen by someone else/another group of people.
The role of the employees and directors in EOT companies is negligibly different to in traditionally owned companies.
The role of the employees and directors in EOT companies is negligibly different to in traditionally owned companies. Ie:
- directors legally responsible for the company, they make strategic decisions.
- employees work for the company, doing as requested by the directors.
The EOT just gives staff some extra power (collectively rather than individually).
What’s the end result for EOT companies?
The trading company itself remains largely unchanged.
The key things that have changed are:
1) What it does with profits
- Long term these are all for the benefit of employees.
- Short term they’re often shared with the founder too.
2) How it makes decisions
- The “circle of power”. More details of this can be found above.
- The impact of these is to empower staff. Not individually, but collectively.
It’s important staff understand they can’t throw their weight around just because the company is employee owned.
- They can’t demand share of profits whenever they like.
- They can’t get their boss fired if they don’t like them.
- They can be fired themselves if their behaviour is sufficiently poor.
The above are no different to employees of privately owned companies.
In EOTs:
- Staff individually have no extra power.
- Staff collectively have lots of power.
- They are entitled to a share of profits, but only when agreed sensible by directors and as approved by trustees.
- They can vote for trustees who can exert power over unpopular directors, but each employee just has one vote.
Examples of Employee Owned companies
Many high-profile UK companies are controlled by EOTs. The most famous is John Lewis. It’s been set up that way for a century, way before it was fashionable!
In 2014 legislation changes made it appealing for other companies to follow suit. Some of the big names that have done so include:
Richer Sounds – Hi-Fi/TV retailer
Aardman Animation – Wallace & Gromit fame
Go Ape – Aerial assault courses
Riverford Organic – Farm/veg box suppliers
Increasingly lots of smaller firms are realising the benefits of EOT ownership too. They don’t make headlines. Few people have heard of them. But they still get the EOT perks! Indeed our founder set up Go EO after successfully transitioning Maslins Ltd (what was his accounting firm) to an EOT.
How to move to an EOT?
In terms of the big picture of what happens:
- the trust is created (a solicitor must create the trust deed, Go EO’s packages include this)
- the EOT company is incorporated to act as trustee
- it has individuals appointed as directors to act as “trustees”
- the founder sells their shares to the EOT
Read about how to get your company ready for transfer to an EOT here.
Summary
Structuring an EOT needs thought:
- is direct employee ownership suitable? If not, look at an EOT
- a trust is controlled by different people to those it benefits
- directors lead the company, trustees loosely oversee them
- trustees should include a director, employee, and independent
- EOT companies have a circle of power, nobody is invincible